New UK prudential regime for MiFID firms On 14 December 2020, the Financial Conduct Authority (FCA) published Consultation Paper 20/24: A new UK prudential regime for MiFID investment firms. This follows the FCA’s June 2020 discussion paper: Prudential Requirements for MiFID Investment Firms.
The FCA is seeking views on the first tranche of its proposed rules to introduce the UK Investment Firm Prudential Regime (IFPR), a new prudential regime for UK firms authorised under the Markets in Financial Instruments Directive II (MiFID II). This is the first in a programme of Consultation Papers and Policy Statements that the FCA will issue to introduce the regime, subject to progress and amendments to the Financial Services Bill 2019-21, on 1 January 2022. The deadline for comments on CP20/24 is 5 February 2021.
The proposed reforms represent a major change for investment firms and the FCA has stated that it is critical that firms adequately prepare for the regime. Following industry feedback, the target implementation date of the IFPR is 1 January 2022.
FCA updates its expectations on SM&CR and APR
The Senior Managers & Certification Regime (SM&CR) applies to almost every solo-regulated firm under the Financial Services and Markets Act 2000, from very small firms (including sole traders and limited permission consumer credit firms) to some of the largest global firms. It also applies to branches of non-UK firms with permission to carry out regulated activities.
The FCA has updated its webpages (here and here) concerning the SM&CR for solo-regulated firms by:
- Confirming that the deadline for solo-regulated firms to have undertaken the first assessment of the fitness and propriety of their Certified Persons will be delayed until 31 March 2021.
- Adding tables on good and poor practice in the areas of fitness and propriety and conduct rules. Firms are reminded that they should demonstrate that they are making regular, thorough and consistent assessments of the fitness and propriety of senior managers and certification staff. Firms should also familiarise themselves with the FCA’s expectations in respect of training staff on conduct rules.
- Confirming that since firms will have now adapted to the impact of the pandemic over the past few months, the FCA’s expectation is that firms’ application of the SM&CR rules returns to normal. Firms should be aware that some of the previously available provisions ended on 7 January 2021 and that the relevant modifications by consent will end after 30 April 2021.
- In addition the FCA has issued an update setting out its expectations with respect to how firms using Appointed Representative arrangements apply the Approved Persons Regime (APR) during the coronavirus pandemic.
Firms should review these updates to ensure they are acting in accordance with the FCA’s expectations.
FCA bans the sale of crypto-derivatives to retail consumers
On 6 October 2020, the FCA published Policy Statement 20/10: Prohibiting the sale to retail clients of investment products that reference cryptoassets (PS20/10).
Firms who carry out marketing, distribution or selling activities in, or from, the UK of the relevant products to retail clients must now comply with these rules. The FCA’s supervision in this area will focus on:
- Attempts to avoid the effect of the new Handbook rules by:
(i) inappropriately opting up retail clients to become elective professional clients; and
(ii) moving retail consumers to associated non-UK entities.
- The conduct of inward passporting firms operating under the temporary permissions regime.
FCA focusses on firms’ client assets arrangements
In August 2020, the FCA published a ‘Dear CEO’ letter to firms that provide non-discretionary investment services to clients. The letter was issued in response of a number firms that hold client money having reporting an increase (in some cases a significant increase) in client money balances in the half year to June 2020.
The FCA will continue to review client money balances through regulatory returns and will follow-up individually with firms that report significantly increased balances. Firms should be prepared for discussions with the FCA on what action they have taken in response to this letter and how their actions are in clients’ best interests.
The FCA published a further ‘Dear CEO’ letter on 30 September 2020 highlighting areas that are particularly important to maintaining adequate client assets arrangements in the current environment. The letter also reminded firms of their obligations to continue to oversee those arrangements and notify the FCA if they identify any material concerns.
New AML guidance to support source of wealth and source of funds due diligence
The Wolfsberg Group has published new guidance for private banking and wealth management divisions within financial institutions to support source of wealth and source of funds due diligence.
The guidance covers the types of information that is useful for each type of due diligence, when and how to corroborate information that has been provided, and how to approach due diligence for customers outside the firm’s usual customer segment.
In order to meet their AML obligations, firms will need to consider their policies and procedures; staff training; engagement of senior management; AML transaction monitoring; and subjecting due diligence arrangements to regular audit and independent review.
HM Treasury consults on regulatory approach to cryptossets and stablecoins
On 7 January 2021, HM Treasury published a consultation paper on the regulatory approach to cryptoassets and stablecoins.
This represents the first stage in HM Treasury’s consultative process on the broader regulatory approach to cryptoassets and stablecoins. It wants to ensure the UK regulatory framework is equipped to harness the benefits of new technologies, supporting innovation and competition, while mitigating risks to consumers and to financial stability.
The consultation paper notes, in particular, that the use of currently unregulated tokens and associated activities primarily for speculative investment purposes, such as Bitcoin, could initially remain outside the perimeter for conduct and prudential purposes. Utility tokens (those used to access a service) could also remain outside the authorisation perimeter. In the longer term, HM Treasury will consider the case for bringing a broader set of cryptoasset market actors or tokens within the scope of regulation.
If the proposals are adopted, further consultations and guidance will be issued by HM Treasury and relevant regulators on implementation, including specific firm requirements. The deadline for comments on the consultation is 21 March 2021.
In Focus: Regulation after Brexit
What do UK businesses trading in the EU need to do now that the Brexit transition period has ended?
Firms should be clear whether the services they provide to EEA-based customers are regulated by EU law and local law, and how their ability to service those customers might now change since the end of the transition period.
Firms should have a clear understanding of their dependencies on outsourcing or third-party service providers and assess whether they will be able to continue providing their services now that the transition period has ended.
Firms that deposit client money and/or custody assets with any institution in the EEA should review their due diligence to ensure that client assets will not be subject to increased risk due to any changes arising from the end of the transition period, and manage any risks accordingly.
Where firms have decided to stop servicing customers in the EEA after the end of the transition period, they should communicate the decision to customers as early as possible, consider what would be a fair timeframe for winding down or transferring business and support customers while they find alternative providers.
What do non-UK businesses trading in the UK need to do now that the transition period has ended?
EEA firms that notified the FCA to enter the Temporary Permissions Regime (TPR) will be issued with a ‘landing slot’ by the FCA, during which period they will be required to apply for UK authorisation. It is expected the TPR will operate for three years with the last landing slot allocated in early 2021.
The FCA expects firms to have carried out significant preparation for authorisation; and will engage with the firms to ensure that the process goes smoothly.
The FCA has consulted on the approach it will take to authorisation of EEA firms (including the types of factors the FCA will take into account when it is considering an authorisation application). EEA firms planning on authorisation should familiarise themselves with this consultation paper (CP20/20) and the final policy statement once it is published early this year.
EEA firms within the TPR must also carefully consider which UK rules and regulatory guidance apply to them and ensure that they are operating in full compliance.
Which incoming EU laws should UK businesses be aware of, and is the UK likely to implement similar rules?
Investment firms and competent authorities in EU Member States must comply with the Investment Firms Directive (IFD) and the Investment Firms Regulation (IFR) from 26 June 2021.
As the new EU regime only applies after the end of the transition period, the UK is not bound by it. However, a new UK prudential regime for MiFID firms (IFPR) has been included in the UK’s Financial Services Bill, and is based on the IFD and IFR The new rules are subject to ongoing consultation. Nevertheless, HM Treasury, the Prudential Regulation Authority and the FCA have confirmed that they are targeting an implementation date of 1 January 2022.
Are there any other areas where the UK regime might start to diverge from that of the EU? If so, what should businesses do to ensure they are prepared?
On 23 June 2020, HM Treasury announced details of the UK’s continued commitment to high regulatory standards for the financial services sector post-EU withdrawal, in respect of prudential and markets regulation.
There are certain areas where the UK has demonstrated a willingness to deviate from the EU rules to account for the specificities of the relevant UK sector.
These include reforms to update UK prudential requirements, to maintain the soundness of UK capital markets, and to manage future risks. In particular, the UK government has announced how it intends to legislate for updated prudential rules to reflect international Basel standards and a new regime for investment firms (see above). The government has also undertaken a consultation on the transposition of the Bank Recovery and Resolution Directive II, and is conducting a
review to improve the prudential rules for insurers.
See also section on ‘Investment Funds’ with respect to proposals to improve the functioning of the PRIIPs regime in the UK to address potential risks of consumer harm.